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The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts

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  • PIETRO F. PERETTO
Abstract
I develop a tractable growth model that allows me to study analytically transition dynamics and welfare in response to a deficit‐financed cut of the tax rate on distributed dividends. I then carry out a quantitative assessment of the Job Growth and Taxpayer Relief Reconciliation Act (JGTRRA) of 2003. I find that the Act produces lower steady‐state growth despite the fact that the economy’s saving and employment ratios rise. Most importantly, it produces a welfare loss of 19.34% of annual consumption per capita—a substantial effect driven by the fact that the steady‐state growth rate falls from 2% to 1.08%.
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  • Pietro F. Peretto, 2011. "The Growth and Welfare Effects of Deficit-Financed Dividend Tax Cuts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(5), pages 835-869, August.
    • Handle: RePEc:mcb:jmoncb:v:43:y:2011:i:5:p:835-869
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    1. Zeng, Jinli & Zhang, Jie, 2002. "Long-run growth effects of taxation in a non-scale growth model with innovation," Economics Letters, Elsevier, vol. 75(3), pages 391-403, May.
    2. Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2002. "The Regulation of Entry," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 1-37.
    3. Pietro F. Peretto, 2007. "Schumpeterian Growth with Productive Public Spending and Distortionary Taxation," Review of Development Economics, Wiley Blackwell, vol. 11(4), pages 699-722, November.
    4. Peretto, Pietro F., 2007. "Corporate taxes, growth and welfare in a Schumpeterian economy," Journal of Economic Theory, Elsevier, vol. 137(1), pages 353-382, November.
    5. Hulya Ulku, 2007. "R&D, innovation, and growth: evidence from four manufacturing sectors in OECD countries," Oxford Economic Papers, Oxford University Press, vol. 59(3), pages 513-535, July.
    6. Christopher Laincz & Pietro Peretto, 2006. "Scale effects in endogenous growth theory: an error of aggregation not specification," Journal of Economic Growth, Springer, vol. 11(3), pages 263-288, September.
    7. Francesco Daveri & Guido Tabellini, 2000. "Unemployment, growth and taxation in industrial countries," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 48-104.
    8. Elias Dinopoulos & Peter Thompson, 1999. "Scale effects in Schumpeterian models of economic growth," Journal of Evolutionary Economics, Springer, vol. 9(2), pages 157-185.
    9. Jakob Madsen, 2008. "Semi-endogenous versus Schumpeterian growth models: testing the knowledge production function using international data," Journal of Economic Growth, Springer, vol. 13(1), pages 1-26, March.
    10. Peretto, Pietro F, 2003. "Fiscal Policy and Long-Run Growth in R&D-Based Models with Endogenous Market Structure," Journal of Economic Growth, Springer, vol. 8(3), pages 325-347, September.
    11. Charles I. Jones, 1999. "Growth: With or Without Scale Effects?," American Economic Review, American Economic Association, vol. 89(2), pages 139-144, May.
    12. Peretto, Pietro F, 1998. "Technological Change and Population Growth," Journal of Economic Growth, Springer, vol. 3(4), pages 283-311, December.
    13. Alwyn Young, 1998. "Growth without Scale Effects," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 41-63, February.
    14. Peretto, Pietro F., 1999. "Cost reduction, entry, and the interdependence of market structure and economic growth," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 173-195, February.
    15. Peter Howitt, 1999. "Steady Endogenous Growth with Population and R & D Inputs Growing," Journal of Political Economy, University of Chicago Press, vol. 107(4), pages 715-730, August.
    16. Dinopoulos, Elias & Thompson, Peter, 1998. "Schumpeterian Growth without Scale Effects," Journal of Economic Growth, Springer, vol. 3(4), pages 313-335, December.
    17. Pietro Peretto & Michelle Connolly, 2007. "The Manhattan Metaphor," Journal of Economic Growth, Springer, vol. 12(4), pages 329-350, December.
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